Is a self-directed IRA a good investment option?

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In the Garfield County real estate market, there are many opportunities to purchase distressed real estate as an investment. There are many great properties priced far below what it cost to build. As an added benefit, the rental market is quite good at this time, and you can purchase properties that actually have positive cash flow.

Self-directed Individual Retirement Account fraud is a big problem, as more and more people lose their retirement savings to these types of scams.

With the stock market struggling over the past few years, the self-directed IRA industry has shown tremendous growth. Naturally, investors have been drawn to these IRAs because of the investment freedom they provide. It's a way to invest outside the stock market and into things like precious metals, real estate and others.

The problem is fraudsters have paid attention to this trend, and are taking advantage of the opportunity. Many self-directed IRA investors are fairly unsophisticated, so they're easy targets for scammers. But with a little education, that doesn't have to be the case.

Make sure your self-directed IRA custodian is properly licensed. These custodians - as with all custodians - are required by law to be licensed. A self-directed IRA custodian can take several forms, however, so make sure you understand if your custodian is a bank or a trust company. You might also hear a company say they are a third party administrator, or TPA.

A TPA handles most of the administrative work on your account, and will be the point of contact for your account, but your funds must still be held with an actual custodian (either a bank or a trust company). If you work with a TPA, you will want to find out who their custodian partner is (which is required to be disclosed in your agreement) and then verify the licensing for that company.

To verify licensing of a bank or trust company, find out which state licenses them. Then go to that state's Department of Banking website and perform a quick search. You should find a link that allows you to verify licensing for regulated financial institutions in that state.

When the time comes to roll your retirement funds from your old account(s) to the new self-directed IRA, make sure the funds are going to the licensed custodian you previously verified - especially if you are using a TPA (they should never handle your funds). Even if you are setting up a self-directed IRA LLC, the funds must go to the self-directed IRA custodian first. After that, they should go to your bank account.

Perform extensive due-diligence on investment promoters. Most of the self-directed IRA fraud today is coming from investment promoters looking to sell investors on great investment opportunities they can make with these IRAs. These promoters understand one of the biggest challenges self-directed IRA investors have is choosing what to invest in. With a traditional IRA, investment options are limited, so deciding on what to invest in is much easier. The promoters talk about why their investment is the best, and then typically promise you tantalizing returns, often even guaranteeing them. This should be an immediate red flag.

If you are considering working with one of these investment promoters (and there are good ones out there), you must perform extensive due diligence. The Internet is an extremely useful tool, but it shouldn't necessarily be your only tool. Here is a list of some due diligence steps you should take:

1. Verify the company is actually licensed. This is a quick and easy search to perform, and while most scammers are smart enough to get a business license, if they don't, you can end talks right there.

2. Verify the company has a physical office, staff and so on. Again, many of these companies will have all those things, but you can weed out some of the bad guys. Even if you can't go to the location in person, use Google Street View and other online means to verify the company's presence.

3. Ask for references, and then reach out to them. Make sure to ask them some generic questions about the company, employees, etc., as well as their experience with the investment. You want to ensure the facts the company gave you match up with this person's story. Also, do a quick Google search on the references they give you to ensure they are real people.

4. Verify the company's investment activity. If you are working with a real estate company, ensure they actually are buying and selling homes in the area. If you are looking to invest with a fund, make sure they are actually making investments. Ponzi schemes are one of the biggest scams out there, and one of the tell-tale signs of a Ponzi scheme is the company doesn't make the investments they say they are making. So make sure you can verify they are investing in what they say they are.

5. Check out the company and its founder(s). Look at Internet message boards, check with the Better Business Bureau and even call the Securities and Exchange Commission to ensure no complaints have been brought up against the company or its founder(s).

If you perform these tasks, you should be able to weed out most fraudulent companies. Don't be afraid to ask for help. Anytime you are preparing to invest large sums of money, it's good to get a second opinion. Rather than relying on your infinite wisdom, talk through the investment with a trusted financial advisor, certified public accountant or attorney. Make sure to go over what you found in your due diligence. It might surprise you how often they will spot something you previously overlooked.

Don't be afraid to walk away. After you put a lot of time and energy into investigating a particular investment opportunity, it can be extremely difficult to cut your losses and walk away. But it's something you have to be able to do. If the company failed somewhere along the line in your due diligence, or even if you just have a bad feeling in your gut, walk away. Remember, you're talking about your retirement money here, not just some extra money you have laying around, burning a hole in your pocket. If things don't look, feel and smell great, move on.

Self-directed IRAs can be an extremely valuable tool in helping you achieve your retirement goals, but for fraud victims, they can easily turn into a nightmare. Follow these tips to help ensure you don't become the next victim. If you have been a victim of self-directed IRA fraud, make sure to notify the SEC and the Better Business Bureau.

At least you can help keep future investors from falling into the same trap.